TFSA Beneficiary: Tax on Growth After the Holder Dies

If someone named you as the beneficiary of their tax-free savings account, you may be wondering what you will actually receive and what tax you will owe. The answer depends on how much the account was worth on the date of death, how much it earned afterward, and whether you were named as a beneficiary or a successor holder.

This article walks through those differences in plain language, based on Canada Revenue Agency (CRA) guidance. Tax treatment can depend on your personal circumstances, so an accountant or lawyer can confirm how it applies to you.

The tax-free part: value at the date of death

A TFSA beneficiary who is not a successor holder generally pays no tax on TFSA payments up to the fair market value of the TFSA at the date of death. That figure is the starting point. It is the value on the day the holder died, not the value on the day the money is paid out.

Ask the financial institution for a statement showing the fair market value at the date of death. You will want it for your records and for any CRA forms.

Growth after death: what is taxable

Growth that happens after the date of death is treated differently. TFSA earnings made after the date of death and before the estate is settled are taxable. If the TFSA is a trust-type account, payments above the fair market value at death are taxable income to the beneficiary and are reported in box 134 of the T4A.

In practice, the longer the account stays open after death while the estate is being settled, the more post-death growth there may be. If the market rises, more of the payout may fall into the taxable category. If it falls, there may be little or none.

The CRA's guidance on how post-death earnings can be treated has been updated in recent years. Confirm the current rules with the CRA or an accountant before you file, because the details can affect how much of the growth is taxed.

If you are the surviving spouse or common-law partner

A surviving spouse or common-law partner who receives a TFSA payout can contribute it to their own TFSA and designate it as an exempt contribution. This does not use up their own contribution room. The total exempt contribution cannot exceed the TFSA's fair market value at death.

To make the designation, the survivor must file Form RC240 with the CRA within 30 days of the contribution, or later if the CRA permits. Beneficiaries who are not survivors cannot designate exempt contributions.

Mark the 30-day deadline on a calendar as soon as you make the contribution, because missing it can leave you needing the CRA's permission to file late.

Beneficiary versus successor holder

A successor holder is not treated the same as a beneficiary. A successor holder immediately becomes the new holder of the TFSA. The value at the date of death and later income stay sheltered from tax. The successor can ask the issuer to transfer the funds between TFSAs, and doing so does not affect their contribution room.

Excess amounts are the main trap. If the deceased holder had an excess amount, the deceased is taxed 1% per month for each month the excess remains, up to and including the month of death. The successor is deemed to contribute the excess at the start of the month after death. If that is more than the successor's room, 1% per month applies to the excess.

• Beneficiary: generally no tax up to value at death, with post-death earnings taxable.
• Surviving spouse or partner beneficiary: may be able to designate an exempt contribution using Form RC240.
• Successor holder: becomes the holder immediately, with value at death and later income sheltered.

What to do next

Start by finding out whether you were named a beneficiary or a successor holder, since the rules differ. The account provider can usually tell you which applies and send the paperwork.

• Get a statement showing the fair market value of the TFSA at the date of death.
• Ask the institution whether you are a beneficiary or a successor holder.
• Keep track of earnings after death and before the payout, since those are taxable for a beneficiary.
• Check your tax slips, including the T4A and box 134 if the account was trust-type.
• If you are a surviving spouse or partner, diarize the Form RC240 deadline of 30 days after the contribution.
• Ask the estate trustee when the estate is expected to be settled, and speak to an accountant if the account is large or complex.

If the estate is complex, or the holder may have had an excess amount, an accountant or lawyer can help you avoid surprises.

Frequently asked questions